The
fall of the House of Morgan has begun as stock
prices on the global market at Morgan Stanley (MS) begin to fall
on the New York Stock Exchange (NYSE).

According to Rick
Wiles : “I’m hearing rumors that another major financial
house is going to implode. In fact, the name I’ve been given is
Morgan Stanley . . . It’s going to be put on the sacrificial alter
by the financial elite.”MS, technically
speaking, is classified as insolvent
based on mark-to-market valuation. By selling off non-core
assets, MS has been able
to “reduce its European exposure” through the manipulation of
hedge funds and allocation of funds to failing financial
corporations. Some mainstream media outlets tout that the Federal
Reserve Bank will come in and assist MS in their insolvency and that
MS “just isn’t going out of business anytime soon.”However, on the bond
market, MS is being treated
like “a junk-rated company.” Moody’s the rating agency that
sells their ratings to whomever will pay for a triple A score, have
announced they will downgradge MS’ ratings which would put all US
banks at risk.Otis Caset, director
of credit research at Markit confirms: “What has driven that,
obviously, is Europe. The perception is — correctly or incorrectly
— that Morgan Stanley is one of the U.S. banks most exposed to
Europe’s problems.”In 2008, with the
first pre-meditated
financial explosion , the cause for the bailout of the banks was
a large sum of cash needed quickly to repay China who had purchased
large quantities of mortgage-backed securities that went belly-up
when the global scam was realized. When China realized that they had
been duped into buying worthless securitized loans which would never
be repaid, they demanded the actual property instead. The Chinese
were prepared to send their “people” to American shores to seize
property as allocated to them through the securitized loan contracts.To stave this off, the
American taxpayers were coerced by former President Bush and former
US Treasury Secretary Hank Paulson. During that incident, the US
Senate was told emphatically that they had to approve a $700
billion bailout or else martial law would be implemented
immediately. That money was funneled through the Federal Reserve Bank
and wired to China, as well as other countries that were demanding
repayment for the fraudulent securitizations.To further avert
financial catastrophe, as well as more debt or property seizure
threats by the Chinese, the Euro was imploded there by plunging most
of the European countries into an insurmountable free-fall for which
they were never intended to recover.MS exposure to
mortgage-backed securities and derivatives fraud may have finally
brought the financial implosion to America. As Otis points out, it is
the exposure to the Eurozone that was the nail in the coffin at MS.
This only furthers the fact that financial collapse is imminent in
America and the repercussions are already laid out.However, this planned
implosion of the mega-banks only serves to fit the global Elite’s
plans.John Paulson recently
traded
in his stocks for 4.53 million shares in SPDR Gold Trust (GLD)
while investing deeper into NovaGold Resources.George Soros has also
sold
his shares and interest in JPMorgan (701,400 shares), Goldman
Sachs (120,000 shares), and Citigroup (420,000). He has reallocated
these funds to gold.The insolvency of MS means that the customer
funds that are held in MS can be hypothecated (or co-mingled) by the
bank into their funds to be used to pay off any loans or debts owed
by the bank.Earlier this month, on
August 9th, the 7th Circuit Court of Appeals (CCA) ruled
that BNYM can be moved to first in line of creditors over the
customers that had their funds stolen by Sentinel Management Group
(SMG).Before SMG collapsed
in 2007, Eric Bloom, former chief executive, and Charles Mosely, head
trader of SMG stole $500 million in customer secured funds and were
indicted
because they exposed customer segregated funds to “highly risky
derivatives.”The SMG ruling means
that the Federal Deposit Insurance Corporation (FDIC) and
Securities Investor Protection Corporation (SPIC) regulatory systems
will not insure customer funds, investments, depositors and retirees
who hold accounts in banks.In fact, the banking
institution is now legally allowed to use those customer funds
deposited as collateral, payment on debts for loans made, or free use
on the stock market to purchase investments as the bank sees fit.When a customer
deposits money into a bank, the bank issues a promise
to have those funds available when the customer returns to
withdraw the deposited amount.With the SMG ruling,
those funds become property of the bank once they are deposited. If
the bank is insolvent, under duress or filed bankruptcy, those
customer deposited funds can be co-mingled with the bank’s funds
and used for the purposes of the bank without recourse to the
customer.As explained in
Readiness Exercise
1984 (Rex84) the end of the US dollar combined with civil unrest
would cause the US government to declare martial law in order to
preserve continuity of government.Since 2010, all the
mega-banks in the US have filed resolution
plans with the Fed describing
how to liquidate banking assets without causing further damage to
a failing financial system. By selling “non-core assets” without
upsetting shareholders while protecting the monetary system,
taxpayers and creditors is the work of the mega-banks who have
contributed solely to the destruction of the global financial
markets.Both Bank of America
and Citibank have already begun liquidity with the sale of their
non-core assets proving that these two financial institutions are
insolvent. Add to this list MS.While mega-banks are
unloading their assets under duress, they are acquiring
smaller banks and keeping their names to fool the American public
into thinking they are banking with an independent as they
consolidate financial power in the US.In response to the
coming implosion, the Federal Reserve Bank is inventing electronic
fiat. This keeps the Ponzi scheme going. On the surface it all
appears to ok. However, undercover and out of the general public’s
sight, the manipulation of insurance rates, market values, mortgages
are directly contributing to the complete banking system collapse.An estimated 70% of
some of the mega-bank’s worth is provided by the government by
subsidies; meaning that without the money provided by the US
government, these banks would go under tomorrow. And by watching the
financial climate as it is emerging, it appears that we are
witnessing just that.Combined with the
solicitations
of the Department of Homeland Security (DHS) for 1.8 billion
rounds of hollow point bullets, 1400 pounds of highly
dense explosives material and urban
warfare drills being conducted across the nation, it is clear
that this insolvency of MS is one more proof that marital
law coinciding with financial collapse is dangerously close.

In
my latest
essay in this space I
mentioned two phenomena worth fighting for: the living planet and
freedom based in anarchy. I surrender. I no longer believe the
struggle matters on either front.

I
no longer think we’ll save the remaining shards of the living
planet beyond another human generation. We’ll destroy every — or
nearly every — species on Earth when the positive feedbacks
associated with climate
change come
seriously into play (and I’ve not previously considered the
increasingly dire prospects of methane
release from Antarctica).

The
climate-change data, models, and assessments keep coming at us, like
waves crashing on a rocky, indifferent beach. The worst
drought in 800 years in the western United States is
met by levels of societal ignorance and political silence I’ve come
to expect. I would be stunned if this valley — or any other area in
the interior of a northern-hemisphere continent — will provide
habitat for humans five years from now. And climate change is only
part of the story.

My
trademark optimism vanishes when I realize that, in addition to
climate chaos, we’re on the verge of tacking on ionizing
radiation from
the world’s 444 nuclear power plants. When we choke on our own
poison, we’ll be taking the whole ship down with us, spewing a
global blanket of radiation in the wake of collapse. Can we kill
every single species on Earth? Apparently we’re willing to give it
a try, and I will not be surprised by our “success” at this
omnicidal endeavor.

Onto anarchy.
Few people understand what it is, and even fewer support it. As a
product of cultural conditioning, the typical American confuses
anarchy with terrorism. Considering the near-term exit ofHomo
sapiens from
this planet, it seems a bit ridiculous of me to express concern about
living outside the absurdity that has become mainstream.

Color
me non-judgmental. Continue to fuck the planet and our future, and
see if I give a damn. Minor efforts to sound the alarm, including my
own, fade to insignificance when compared to the juggernaut of global
imperialism. These efforts have long been irrelevant; it’s my
awakening that is new.

And
color me sad, of course, at the societal path we’ve taken. Swept up
in the pursuit of more instead of better, we’ve become the waves
approaching the rocky shore.

We
had an opportunity to return to our tribal roots, as others have done
when civilizations collapsed. Consider, for example, the survivors
from the Olmec, Chaco, and Mimbres cultures, all of whom chose
tribalism when civilization failed. Tribalism worked for two million
years in a diverse array of situations. It worked before and after
civilizations arose in specific regions. For many decades, our
version of civilization has been successful only for a few
individuals of one species, yet we keep tinkering with the system
long after
it’s failed.

Despite
considerable evidence to the contrary, we’ve come to believe
industrial civilization is the only way to live. As we’ll soon
discover, it’s the only way to die, at least at the level of our
species.

Inspired
by Kurt Vonnegut’s eponymous
poem,
I offer the following Requiem for Earth.

If
Earth could sing with a female voice.Her strength would be
evident, though her tone might waver.

Could
she withhold judgment against one of her own,through all we’ve
done to her, and our brethren?

We
lived in her bosom from which we were bornfor two million years
not forsaking our home.

Then
we became something different from all we had known,and in the
gasp of a breath we destroyed it all.

Can
you blame her for judging us, considering what we’ve done?She
gave us every chance to turn it around.

Now we’re
all done and
she’s endured our abuse,including pillage, plunder, and rape
without any excuse.

All
she can sing in that mournful tone is sorrow for the power she
unleashed,through us and thus dispassionately onto herself,
destroyed by one of her own.

She
must ponder how our hubris overwhelmed our humilityin concluding
about our recent selves: They didn’t like it here.

Dr.
William Rees is a professor emeritus at the University of British
Columbia and former director of the School of Community and Regional
Planning (SCARP). He is the originator of the "ecological
footprint" concept and co-developer of the method. In this
interview he speaks with us about why we're in denial about the
failure of the human enterprise. We ask Bill about the reasons we're
in denial and how we could start adapting to our ecological
challenges through a new cultural narrative

George
has his own areas of denial (one might say madness) – such as
embracing nuclear power and entering the world of Peak-Oil denial –
but I can't fault him for these sentiments. I have no doubt of his
good intentions.

The
day the world went mad

As
record sea ice melt scarcely makes the news while the third runway
grabs headlines, is there a form of reactive denial at work?

Yesterday
was August 28th 2012. Remember that date. It marks the day when the
world went raving mad.

Three
things of note happened. The first is that a
record Arctic ice melt had just been announced by
the scientists studying the region. The 2012 figure has not only
beaten the previous record, established in 2007. It has beaten it
three weeks before the sea
ice is
likely to reach its minimum extent. It reveals that global climate
breakdown is proceeding more rapidly than most climate scientists
expected. But you could be forgiven for missing it, as it scarcely
made the news at all.

Instead,
in the UK, the headlines concentrated on the
call by Tim Yeo,
chair of the parliamentary energy and climate
change committee,
for a third runway at Heathrow.
This sparked a lively debate in and beyond the media about where
Britain's new runways and airports should be built. The question of
whether they should be built scarcely arose. Just as rare was any
connection between the shocking news from the Arctic and this
determination to increase our emissions of greenhouse gases.

I
wonder whether we could be seeing a form of reactive denial at work:
people proving to themselves that there cannot be a problem if they
can continue to discuss the issues in these terms.

The
third event was that the Republican party in the United States began
its national convention in Tampa, Florida – a day late. Why?
Because of the anticipated severity of hurricane Isaac, which reached
the US last night.

"Basic
theory, climate model simulations, and empirical evidence all confirm
that warmer climates, owing to increased water vapor, lead to more
intense precipitation events even when the total annual precipitation
is reduced slightly … all weather events are affected by climate
change because the environment in which they occur is warmer and
moister than it used to be."

The
Republican party's leading lights either deny climate change
altogether, or argue that people can adapt to whatever a changed
climate may bring, so there's nothing to worry about.

The
deluge of reality has had no impact on the party's determination to
wish the physical world away. As Salon.com
points out,
most of the major figures lined up to speak at the convention deny
that man-made climate change is happening.

When
your children ask how and why it all went so wrong, point them to
yesterday's date, and explain that the world is not led by rational
people.

Writedowns
on the value of its underground coal mines, renewable energy projects
and experimental underground coal seam gas plant have pushed Solid
Energy to a $40.2 million loss, although underlying earnings after
tax were 16% higher than the previous year.

The
$99.2 million underlying earnings figure excludes $151.7 million of
writedowns and was described by outgoing chairman John Palmer as
"good in a deteriorating market."

The
company is using the writedowns, based on slumping global coal
prices, to justify as many as 370 job losses at its Huntly East and
Spring Creek underground mines, and in other parts of the business,
including head office.

The
restructuring was announced Wednesday, ahead of today's profit
release.

The
government has already signalled that Solid Energy, one of five SOEs
slated for partial privatisation, is off the list for a share float
while it works to get back on track financially. But Palmer said this
showed why Solid Energy should be partially privatised.

"It's
ironic, given the issues around Solid Energy today is that if you
wanted the best reason for partial privatisation, then the commodity
nature of the business and its dramatic turnaround in fortunes is the
very best reason."

Such
a risk profile was "unsuited to total Crown ownership,"
said Palmer, expressing "some regret" at leaving the Solid
Energy board after six years as the company faces a difficult couple
of years.

While
revenues for the year increased 18% to $978.4 million, that was
partly because coal due for shipment from Lyttelton Port before the
end of the last financial year were delayed by the June 2011
earthquakes.

Earnings
before interest, tax, depreciation and amortisation were just $44.9
million for the year to June 30, a 78% drop from the previous year's
$200.8 million.

The
result is also well shy of broking house Forsyth Barr's $204.4
million ebitda forecast, prepared last November for the Treasury's
Crown Ownership Monitoring Unit, which oversees the performance of
state-owned businesses.

While
the company has not released audited accounts to back today's profit
announcement, a simplified financial results table also shows that
gearing has rising to 42% from 30% a year earlier, reflecting $250
million of capital expenditure over the last four years.

Solid
has cancelled some $100 million of capex for the current financial
year.

Palmer
said the company's financial situation would be "challenging and
is worse than during the 2008 global financial crisis."

"In
2008-09, when US dollar export prices collapsed, the New Zealand
dollar followed. Coal prices rebounded relatively quickly in the
following year, whereas this time, with a high New Zealand dollar, we
expect prices to be weak for a prolonged period."

Today's
statement also makes explicit that the state-owned coal miner will
spend no further money developing renewable energy options.

"The
company has made a significant investment developing renewable energy
businesses," said Palmer. "The harsh reality is that other
fuels are far more competitive in the current financial environment.
We took a long run of these businesses, which relied on a sustained
price premium which has largely failed to materialise."

As
a result, the company is selling its bio-diesel business, which it
has written down from $17.7 million to $8.7 million, and its Nature's
Flame wood pellet burner fuel manufacturing unit from $37.5 million
to $13 million.

The
book value of the Spring Creek mine has almost halved from $137.3
million to $73 million, while Huntly East, on which major capital
expenditure has been cancelled, sees its book value fall by $33.8
million to $32.1 million.

Solid
is also writing off the $18.5 million it spent developing an
underground coal seam gas unit at Huntly, although it intends
establishing new UCG operations in larger coalfields in Taranaki as
part of its turnaround plan.

A
further $22 million of on-off costs were also declared, including
$9.5 million on the value of Spring Creek stores and Nature's Flame
inventory and onerous contracts.

On
top of that, there was an after-tax impact of $9.1 million, caused by
backing out tax losses relating to Spring Creek, which the balance
sheet restructuring cancels out.

This
is an important update on the U.S. drought of 2012, the combined
record-setting July land temperatures, and their impact on food
prices, water availability, energy, and even U.S. GDP.

Even
though the mainstream media seems to have lost some interest in the
drought, we should keep it front and center in our minds, as it has
already led to sharply higher grain prices, increased gasoline costs
(via the pass-through of higher ethanol costs), impeded oil and gas
drilling activity in some areas (due to a lack of water), caused the
shutdown of a few operating electricity plants, temporarily reduced
red meat prices (but will also make them climb sharply later) as
cattle are dumped in response to feed- and pasture-management
concerns, and blocked and/or reduced shipping on the Mississippi
River. All this and there's
also a strong chance that today's drought will negatively impact next
year's Winter wheat harvest, unless a lot of rain starts falling
soon.

The
good news from Hurricane Isaac is that he's traveling on a perfect
path to deliver relief to one of the most heavily drought-impacted
areas:

There
are steps that everyone can and should take to become more food- and
fuel-resilient in case the drought persists – as some experts think
is quite possible – into next year and perhaps a few more. We'll
get to those steps shortly.

Further,
there will be a definite impact to U.S. GDP, which could add to
pressures (excuses?) that the Fed may use to justify additional
quantitative easing (QE) measures (otherwise known as 'printing more
money').

U.S.
Drought Intensifies

The
drought in the U.S. has intensified in the recent weeks, even though
it has somewhat dropped from the front pages of mainstream media,
possibly because the story is stale or possibly because it's just too
serious to dwell on for long:

Much
of the drought is centered squarely over the U.S. 'breadbasket'
region and has really dented this year's harvests in a big way.

Crop
Losses

Certainly
the number one story around the U.S. drought centers on its impact on
grain production, specifically corn and soybeans. In a minute
we'll discuss the other impacts, but we'll start with the one that
has the greatest potential to cause both suffering and strife over
the coming months (and possibly years), especially for those on
limited budgets.

In
2011, the U.S. reaped a corn harvest of some 314 million tons.
In 2012, the USDA has estimated a harvest of 274 million tons – a
shortfall of 40 million tons – despite record acreage being
planted.

While
the USDA has been steadily reducing their crop estimates, practically
with every passing week, it seems likely that the USDA remains behind
the curve today, as it has been every step of the way. A different
source for information comes from the Pro Farmer Midwest Crops Tour,
which is coming in slightly under the current USDA estimates:

Initial
reports from the closely watched Pro Farmer Midwest Crop
Tour suggested
more crop damage than expected from the drought,
raising the potential for diminished soybean production this fall and
sending futures sharply higher.

The
disappointing crop reports from scouts touring fields on the Pro
Farmer crop tour in states such as Ohio and South Dakota make
it hard to believe soybean yields will reach current U.S. government
crop projections,
said Don Roose, president of advisory and brokerage firm U.S.
Commodities in West Des Moines, Iowa.

The
market is in the "watch and worry" mode on all fronts
as shrinking
crop forecasts will further tighten supplies already projected to
dwindle to precariously tight levels in 2013,
Mr. Roose said.

On
the annual Pro Farmer tour, analysts and investors walk corn and
soybean fields in seven Midwestern states over four days to assess
prospects prior to the fall harvest.
Pro Farmer is an agricultural advisory firm. The Pro Farmer tour,
which wraps up Thursday, reported diminished potential for the
soybean crop in both Ohio and South Dakota.

The
crop tour doesn't estimate soybean yields, but it reported an average
584.9 pods per 3-foot-by-3-foot square area in South
Dakota, down 47% from
a year ago. In Ohio, scouts reported soybean counts at an average of
1,033.72 pods per 3-foot-by-3-foot square area, down from 1,253.2
pods a year ago.

Soybeans
entered their critical growing phases in recent weeks, and the
crop has benefited in some regions from recent rains across the
eastern Farm Belt.

Meanwhile,
scouts with the Pro Farmer Midwest Crop Tour on Monday reported an
average estimated corn yield in Ohio
of 110.5 bushels per acre,
down from the tour's estimate of 156.3
bushels a year ago.
In South Dakota, tour scouts reported an average yield estimate of
just 74.3 bushels per acre, down from 141.1 bushels a year ago.

While
commodities traders and agronomists have braced for weeks for the
prospect of a crop decimated by drought, the
estimates were lower than many had expected.

The
summary here is that the Pro Farmer Tour is reporting crop yields to
be 2% - 3% lower than current USDA forecasts, which is a big deal
when it comes to food. We're talking a few
tens-of-millions-of-bushels' difference.

The
somewhat sour note in this unfolding drama is the fact that 40% of
the nation's corn crop goes to ethanol producers, which means that
food will be burned in the nation's auto fleet instead of helping to
keep prices down for consumers and animal feed. Another 40%
goes to animal feed (chicken, cattle, hogs, etc.), and the remaining
balance goes to direct human consumption.

However,
the ethanol mandate is a congressional requirement for our fuel
blenders, so they do not have a choice in the matter. It would
literally take an act of Congress to even temporarily suspend the
ethanol requirement – and in an election year, that's just not
going to happen, given the powerful constituencies invested in
preserving that mandate.

Of
course, higher input costs will ripple through the entire chain, so
perhaps Bernanke will get the inflation he seeks, although it won't
be the one he wants. The inflation he wants is simple
monetary-driven inflation. The inflation he will get is nothing
more than a supply/demand mismatch.

Still,
the USDA has a handy calculation for estimating the future impacts:

Aug
13. 2012The
USDA has provided considerable information about
how the drought’s effects were likely to percolate through the
economy.
Because of a smaller-than-expected corn crop, the USDA said it can
make the general prediction that “we
will see impacts within two months for beef, pork, poultry and dairy
(especially fluid milk).
The full effects of the increase in corn prices for packaged and
processed foods (cereal, corn flour, etc.) will
likely take 10-12 months to move through to retail food prices.”

The
USDA has a formula for predicting changes in the rate of inflation
caused by gains in prices at the commodity level: if
the farm price of corn rises 50%, retail food prices rise by 0.5% to
1% as
measured by the Consumer Price Index (CPI).

The
price of September corn futures from mid-June until early August
advanced 55%, meeting the USDA’s criterion for a measurable
increase in the CPI Lapp presented a more extreme scenario than the
USDA. He predicted that the damage
to the 2012 corn crop will translate into a food inflation rate of 4%
to 5% in 2013.
In his view, the dollar cost of the drought already was $30 billion,
which accrued rapidly over the summer.

“This
is a cost that somebody has to bear,” Lapp said. “Some price
hikes are fairly quick and others take a while.”

He
said high feed costs will have to be absorbed by producers, who will
likely liquidate part of their cattle and swine herds and poultry
populations. At the retail level,
the drought’s effects will translate into narrower margins — and
expected higher prices — for processed food and soft drink
manufacturers among
others.

Lapp
offered his opinion that legislation
that has effectively required 40% of the corn crop be used in making
biofuelshas
made everything worse.

“The
situation has been aided and abetted in a negative way by the
biofuels mandates,” he said.“Shame
on us for having mandated so much to corn ethanol” without creating
contingencies for a bad crop year.

Because
corn is the base unit for so many things (especially in the form of
high-fructose corn sweetener), and because it's a primary feed
component for finishing cattle and raising chickens and hogs, it
tends to have a pretty decent impact on food prices.

However,
it takes time for those price hikes to work through the system. So it
will not be until 2013 sometime that we really begin to feel it in
the U.S. And for the rest of the world that lives more directly
on grains? They're not as lucky. The price hikes hit them
almost immediately.

It
looks like the harvest in Russia will be below expectations as well:

(Reuters)
- Two leading Russian agricultural analysts cut their forecasts for
Russia's grain harvest on Monday after harvest data from two
drought-stricken eastern growing regions reduced the outlook for the
overall crop.

The
government's official grain harvest forecast is 75-80 million tonnes,
of which 45 million tonnes could be wheat.
The government has put this season's exportable surplus at 10-12
million tonnes,
a level seen by traders as an informal cap on exports.

The
government has tried to reassure markets there will be no repeat of
August 2010, when Russia's government shocked markets with a snap
decision to ban grain exports when
the scale of losses from major drought became clear.

The
government has indicated that protective tariffs could be an option,
though only after the end of the calendar year.

But
traders widely expect limits to be imposed in some form, perhaps as
early as November, after
heavy exports in the early months of the season showed Russia could
hit the 10-12 million tonne mark sooner than January.

Russia
is still officially projecting 75-80 million tonnes but may only get
71 tonnes. If the projected exportable surplus is 10-12 million
tonnes, but Russia actually harvests 9 million tonnes less than their
hoped-for projection, then its exports will have to decrease to plug
that gap.

Here's
the kicker: Russia has already exported a good deal of that amount.
That is, the prospect of another Russian export ban this year is
quite realistic. If we get one, then we can expect a repeat of the
turmoil in the grain markets that we saw in 2010.

But
there's another much more fundamental reason why we can expect higher
prices going forward.

Need
for Even Higher Prices

The
good news is that there's still plenty of supply to carry us through
to the next harvest. However, demand is going to have to go
down some, and the way we accomplish that is through the price
mechanism.

Right
now, physical grain traders are saying that prices are too low and
that unless they rise, we're going to run out of grain before the
next harvest. Obviously, that's not truly going to happen –
increasing scarcity will cause prices to rise until current demand
levels are reduced.

Corn
prices surged this month to an all-time high of $8.4375 a bushel
on the back of the worst drought in the US in nearly half a century.
But prices have since fallen roughly 5 per cent. The
impression is the rally has run out of steam.

This
is far from the real picture. Prices need to rise again –
probably setting all-time highs – to dampen consumption that is
running ahead of supply.

If
demand does not slow down, silos will be all but empty before the
next harvest arrives in late 2013.

On
paper, the balance sheet for corn supply and demand published by the
US Department of Agriculture seems good enough. But in practice, the
numbers look a bit shaky. The agency, whose figures are closely
watched by the market,
first estimates supply and, after that, adjusts the demand data to
maintain a minimum level of inventories.

This
time the USDA is asking for monumental rationing on the demand
side. For
example, US corn feed and export demand will
need to drop to their lowest levels in nearly 20 years.

The
USDA is also forecasting lower ethanol production – and
thus corn demand. Ethanol output has fallen, but not nearly enough.
Worse, the rise in wholesale petrol prices back above $3 a
gallon means that ethanol producers are profitable again, even when
paying record corn prices.

Corn
is now trading just above $8 a bushel – but traders
in the physical market say that prices need to rise to $9-$10 to
force demand down enough to
meet the consumption levels anticipated by the USDA.

The
retreat in corn prices over the past couple of weeks has given
inflation watchers a false sense of security. The
market should not relax, however.
More food inflation is just waiting around the corner.

The
idea here is that the cash market will have to lead the futures
market higher, an odd situation because it is usually the other way
around. With so many hedge funds now playing in the commodity
space, one explanation is that they are simply playing paper games
with each other – those playing the short side will get a lesson in
the importance of keeping one eye on reality.

A
truly shocking event would be if the U.S. ever gets to the position
of limiting exports of corn or even soybeans. That is a very
unlikely proposition to consider, but if the silos get drained
because we have dysfunctional markets that saw fit to keep prices
bizarrely low while our free trade agreements allow the too-low
grains to be exported, threatening domestic supplies, then that
possibility notches up a little bit.

Dairy,
Meat, and Even Higher Gasoline Costs

While
it is clear that basic grain prices are heading higher, the knock-on
effects into other soft commodities are a little less clear, but are
definitely still important to consider.

The
most obvious of these are higher grain feed costs that will hit both
livestock and dairy producers especially hard:

The
withering crops are translating into higher feed costs for livestock
producers.
"This is different than anything I've ever experienced,"
said Kent Pruismann, who raises cattle and hogs on a farm in Sioux
County, Iowa, and saw his costs
for feed jump by 20% in July.

The
higher corn, soybean and wheat prices will reach food makers,
exporters and eventually consumers. Drivers
already have seen fuel costs climb because of higher prices for
ethanol,
a corn-based fuel that is blended into gas. The drought also has
reignited the debate over whether ethanol production is a drain on
global food supplies.

However,
it will be the cost of and even lack of hay that will really create
some big problems later this year. The drought not only harmed
the range and pasture lands, forcing greater use of stored hay to
offset the decline in forage, but it put a huge crimp in this year's
hay production:

Widespread
drought has scorched much of the pastureland and hay fields needed to
sustain cattle herds in
the U.S., forcing many ranchers to find feed alternatives or sell
their animals early into what has become a soft beef market.

The
shortage has led to higher hay prices, with some farmers
saying they have to pay two to three times last year's rates.

Despite
farmers setting aside more land to grow hay this year, they are still
producing a lot less because of the drought,
according to a recent Department of Agriculture estimate.

The
harvest of alfalfa,
generally considered to make the best hay because of its high
nutrient levels, is
forecast to be the worst since 1953,
according to the USDA.

Pasture
grass and hay are what most cattle are fed for the roughly two years
they live before being slaughtered, but the
drought is threatening to starve the animals.

Illinois
rancher Steve Foglesong said that most
years he could graze his cattle from spring through November on
verdant fields that are now brown,
buying them hay bales only in the winter. This year, he and his
animals have their eyes on withered corn plants.

"It
may not have any ears on it, but it makes pretty good cow feed,"
he said.

John
Erwin, who owns 20 acres of land in Shelbyville,
Ill., said
he is having trouble growing alfalfa hay, but demand is strong for
what he can produce.

He
said he has been offered $250 a ton for his hay, nearly
double the
$130 a ton in a non-drought year. His
fields didn't produce any hay in July.

A
doubling of hay prices is obviously going to create quite a bit of
economic hardship for many farming operations, which tend to be
marginal profit businesses even when everything is going well.

Here's
another view on the hay situation:

I
spoke with Caldwell [of Indiana horse rescue] and a number of other
horse-rescue organizations around the country by telephone this week.
The relentlessly hot dry weather, amplified in many areas by
wildfire, has been devastating to farmers, ranchers and other horse
owners.

“Everybody
is using their winter hay now. The pastures are destroyed and they
probably won’t recover before winter,” said
Caldwell. “The
price of hay has doubled, and the availability is down by 75
percent.”

Caldwell
is somewhat sanguine about his own lot, but not optimistic about what
lies ahead.

“Today
the problem is not nearly as bad as it’s going to be,” he told
me. “It’s terribly bad today, but it is going to get a lot
worse.”

The
drought has done some very serious harm to the nation's hay supply
that goes beyond the economics of higher hay costs. First
there's the supply of the hay, and then there's the relatively poor
quality of hay that was taken from non-irrigated, drought-stricken
fields. All in all, it's not a good situation.

To
add a bit more difficulty into the situation, it turns out that
drought-stricken silage and even the corn itself can be harmful to
animals:

COLUMBIA,
MISSOURI, U.S. — Tim Evans, an associate professor of
veterinary pathobiology and toxicology section head at the Veterinary
Medical Diagnostic Laboratory at the University of Missouri College
of Veterinary Medicine, Columbia, Missouri, U.S., warns U.S. farmers
and livestock producers that drought-damaged
corn plants can pose a risk to animal health.

“This
chemical can be very harmful to animals, especially cattle, if
they eat corn plants or other vegetation containing too much nitrate.
Eating plants with too much nitrate can cause damage to red blood
cells, resulting in lethargy, miscarriage, and even sudden death.”

Evans
says that in normal conditions, corn crops typically absorb nitrate
into only the lower 12-18 inches of the stalk, which does not have to
be fed to animals. However, during
severe drought conditions, high concentrations of nitrate can
accumulate in the upper portions of the stalk, which cattle and other
livestock often eat.

Evans
also says that many
naturally growing plants and weeds in grazing pastures can accumulate
nitrate during drought conditions, as well. These
plants include many types of grasses and some weeds, which animals
might be forced to eat because of limited pasture or hay available as
forage for livestock.

The
key here is that nitrates are safe below 2,000 ppm but toxic above
15,000 ppm, and the levels found in the stalks and how high it
travels are a function of whether enough rain fell to allow the plant
to take it up. Much of the corn crop was so desiccated that the
plants could not even manage to draw up this nutrient, and therefore
it is safe as a feed product.

While
it's hard to get a read on at this early stage, there are enough
warning signs here pointing to much, much higher grain, food, and
meat prices in the future. The worry is whether there will even
be enough feed to sustain the animal populations through the Winter
and Spring. Given the damage to the harvestable corn, a lot of it is
going to be turned into silage

Many
ranchers and farmers are faced with a horrible choice here.
Saving their herds may be economically unsound or even impossible
where hay and safe silage are not available, and so they are selling
their herds, one of the most heart-wrenching decisions anyone could
have to make.

So
many are doing this that recently the price for cattle has dropped,
as everyone is selling into an increasingly soft market. My
advice is to enjoy these low meat prices while they last, because the
next stage of this story involves much higher meat prices.

The
problem with understanding just how bad the hay situation might (or
might not) be is that there are no national statistics collected that
could tell us whether or not there's even enough hay available to
sustain the current commercial and recreational livestock
populations.

The
Importance of Positioning Yourself

So,
with all of these repercussions building during the current drought –
to which there's yet no end in sight – what can you do today to
minimize their impact on your budget and lifestyle?

Part
II: Positioning for the Drought's Aftermath looks
at the likeliest outcomes in food prices, food availability, energy
prices, and macroeconomic consequences (of which there will no doubt
be many from this drought). We have a national food distribution
system that runs significantly on a just-in-time basis, which leaves
it vulnerable to price and inventory shocks when there are supply
disruptions. The reduced water levels caused by the drought are
handicapping electrical power generation in growing regions in the
country; electrical thermal plants are the number one biggest user of
water in the U.S. The global financial markets are similarly
tenuous these days, as resources are already taxed in trying to
stimulate the moribund U.S. economy and dig Europe out of its massive
credit woes.

This
is one of those moments where taking simple, prudent steps now can
have an outsized effect on preserving your quality of life.